There have been 3 bubbles since human being found out the trick of pumping up the economy with "fiat money". After all, human can create unlimited amount of "fiat money". That is a very powerful weapon.
(1) The first bubble: to build the internet
In the late 1990's when "internet" was first introduced to the public, human realized this to be something that the whole race would have use for. How do we get to develop and build all the infra-structure? Easy, we have unlimited money . Don’t we?
So we gave the “internet industry” as much money as they want. Basically, anyone who started up any business with the name “telecommunication”, “ fiber optics”, or “dot com” will be endorsed with plenty of money to do the work.
When the bubble bursted, many indiviuals got hurt, but to the whole society, the mission was accomplished. The whole internet infra-structure was well built up and more.
(2) The second bubble: to build housing
Everyone wants to have his or her own home, right? After all, isn’t that the American dream? Housing is an easy target after we desperately need another bubble to pump up the economy. So we started to put all the money into housing. We finally reached to the point that, a person without a job and without a downpayment can also buy a house…well, all it takes is fiat money, and that we have unlimited amount.
After the housing bubble bursted, many individuals got hurt. But who cares? The society can sacrefice as many individuals as possible up to the point that the society stays intact.
Now we have built so many houses…more than we need. See? We hace accomplished a lot !
(3) The third bubble: to provide social programs and entitlements
All poor people should be taken cared of and provided a good life. After all, that is basic human right to live in dignity, right?
So we started to build government social programs , to help the poor, to feed the needy. After all, all it takes is fiat money, which we do have.
Actually, that bubble is about to burst. Greek, Ireland, Portugal, California,…one by one, many governments are facing big budget troubles. Just like that dot com company who grabbed 5 million dollars but did nothing useful. Or that jobless guy who bought a house, and stayed home everyday watching TV. The people of those governments are living a life that they can not afford.
When this bubble burst, again, most individuals would get hurt badly.
The 10 year treasury note yield is down to 2.6%.
For 10 years! The big money is putting their money out for 10 years, with a mere 2.6% interest. I think this is the most significant piece of data that tells the current economy: Money is cheap!
Cheap? It means that, there is too much supply but too little demand. Too much supply of money, because the governments are trying their best to boost the economy. Too little demand for money, because there has been an over production in many sectors. We do not need captal to build more. We do not need capital to manufacture more. We have had enough. In fact, we have had too much.
Of course, as an investor, the focus is: what would happen next?
What would happen next with too much money, but too little demand for capital?
I think those few enterprises making things that people still want would benefit substantially with the cheap money.
As for S&P 500, I think it would fructuate between 1040 and 1200 during the next 2 months. If it is closer to 1040, you should have more stocks than cash. If it is closer to 1200, you should have more cash than stocks.
Don't tell me what has happened in the past. Don't tell me what will happen in the future.
Just tell me what is happening, now.
That is rude, but that is the only way to get true answers from a stock trading guru. And, that is the way you should ask , if you happen to be fortunate enough to sit across Warren Buffett in the club house.
I know Mr. Buffett's answer. He will tell you that he does not know. Sure, why should he tell you?
OK. Where is the S&P heading from here?
I think it will be in a trading range of between 1040 and 1120.
To many people, that is still too big a range to tolerate. But here is the guide line: When S&P is cloer to 1040, I think you should increase your stock portfolio . On the other hand, as it approaches 1120, you should add to your cash position.
I am talking about the time horizon of 1 month. I think the US economy will be under weak recovery. The stock swing? It is most decided by the price. When S&P is nearly 1040, America is a bargain. When S&P is 1120, I think there is enough risk to avert from America.
I came to US as a graduate student in 1978. I started working in Silicon Valley in 1980. I heard friends who have been here earlier saying that, housing is moving up faster than my savings as an engineer. So I did not eat for 2 years, and saved $50,000 as down payment to buy my first 4-plex for $255,000. I figured that, if housing price moved up 10% a year, with 20% down payment, the leverage would give me 50% return on my investment.
That investment strategy has been working well for me , but I have always been wondering about one thing. My father worked his whole life in Taiwan, but he only managed to buy a $100,000 house. I only worked 2 years in US, but I bought a $255,000 house. Why?
The answer is this: The US government is smarter. Economy growth relies on capital, but capital can be created by “credit”. My father in Taiwan must accumulate his savings of a whole life to buy a house because there was no “credit” available. Me, an US immigrant, can buy a house in the value of 5 times the money that I really have.
Indeed, I was only an insignificant individual who rode the wave of a primary trend. The seed of that primary trend was rooted in 1971, when Nixon discarded the gold standard. Without gold standard, US government can create more money ( as credit) than it really owns (gold).
That was a wonderful trick. Just like any good trade skill, the whole world learned quickly. During the mid 1980’s, , many nations, including Taiwan, also learned about this “credit” trick and created their own economic boom.
The US enterprise also learned this trick and applied on their business. During the heated peak of the telecom boom, some companies , including the likes of World Com and Lucent, started to “lend” money to their customers to buy their products. See the pattern? You do not have money to buy? Fine, use credit to buy!
The tech bubble busted in 2000. Basically, the trick was played to the end…the borrower finally maxed out.
In the mean time, the housing bubble continued. In 1980, I thought I was privileged to buy a house 5 times the value of my down payment. In the year 2006, I heard from my tenants that they can buy a house without any down payment. That reminded me of World Com and Lucent in year 2000.
Finally, the housing bubble also busted, this time, it is the US financial institutions that went down the drain. That is the final death of the “credit “ trick: the banks went bankruptcy.
Wait! The US government is coming to rescue. After all, the US government can print all the money it wants. So the US banks , and hence the US economy were saved. Everything seems to get back to normal again….Until last week.
Greece, Portugal debt fears rattle the world financial market again! Who would be the next? Spain? UK?
See? So many sovereign nations…as bad as the US consumers , they have been living on credit as well!
Richard Russell claimed that the credit economic boom started from 1980 was coming to an end. That trick is over. Here is his “RELUCTANT” prediction of the DOW…after all this credit mess settled.
He was reluctant to tell his number, because people would tag him as an old confused fool. However, he has been an consistent bear since the year 2000. He believed that the year 2000 was the peak. He believed the boom from 2003 to 2008 was just a bear market correction. He has been dead right so far.
Now here is his DOW prediction.
If you have high blood pressure, I would suggest you to sit down, take a deep breath, before you see his DOW prediction at the end of this bear market.
DOW: 1000. ( MJ note: this was the DOW in 1980, when the credit bubble started)
I think the following chart is the single most important chart to watch at this time. It is the US dollar weekly chart. Now the dollar is at the balanced juncture…it is on the way up, but hitting an important resistance now.
If it broke upward, then it is time to sell the Gold, Oil, and other commodities.
On the other hand, if the dollar turn down from here, then add on the Gold, Oil and other commodities.
Dubai broke, as expected. It is asking an extension of 30 billion credit payment that shook the world’s market last Wednesday.
What would be the effect of Dubai’s debt crisis?
I think the most important would be the power shift within the UAE (United Arab Emirates). Dubai would accept its own screw up and be quiet for a while, while the oil rich Abu Dhabi would become the domnant ruler of the UAE.
As to the US stock market, I believe the effect should be short term and limited.
However, this crisis does remind us once again: Hardware is cheap. It is Software that would last and prosper.
Attached is the S&P 500 weekly. Since S&P broke out of its reversal head and shoulder pattern, it has moved higher and higher.
What has been the force that propelled this rally? I think it is the Fed zero interest policy. Money tends to flow to places of higher yield. When there is absolutely no interest to earn in savings accounts, and US dollar ‘s future is in doubt, the temptation to get into the stock market is obvious.
Stock moves in waves, though.
If 8% is significant money to you, I would wait for the correction to put the new money in.
After 9/11 attack, Greenspan flooded the world with US dollars in an effort to avert a whole blown economic disaster. He succeeded. Not only the US staged a two fronts war, there was abundant of extra US dollars in the system. The banks seized the opportunity to give the mortgage loans to almost anybody who wanted one. As the mortgage loans became available to everyone, the housing price moved higher and higher even at the wake of a dotcom bubble. No problem…with the money, we can build more houses to meet the demand. The wars? We had all the defense industries that were happy to provide as long as they got paid. We also had the Chinese to provide all the clothing, furnitures, and toys for our soldiers' wives and kids.
They are happy , too, because we bought all those with money.
I think July 4, 2008 is the day when this money created prosperity hit the nag. On that day, oil hit a record high of US 145 per barrel. Soon after that, the stock market started to break down, and the unprecedented economic tsunami started.
Yes, by flooding the world with money, every human resources can be put to produce. We can build houses, bridges, airports, airplanes, casinos, …as many as we want. After all, there are still billions of people who want to work.
But there is one problem. The natural resources are limited. Of all the economic activities, most require the exploit of the resources of the earth. True, we still have many human resources on earth that are untapped. However, the sad fact is that, the available natural resources are just not enough to support the whole human population.
I think this is the fundamental problem, a problem that money can not solve.
Since I first visualized a reversed head and shoulder, 2 months has passed. ( It takes patience…) Now that we revisit the chart, not only the reversed head and shoulder pattern has completed, the SP500 has broken up the neckline. The market is saying: the worst is over. For the longer term, it is safe to invest in the US equity market now. What will be the best timing to add more stock portfolio? My guess is a 7% pull back from the current price, or, S&P 500 at 930.
What if Richard Russell ( Dow Theory Letter) is right that, this is a bear market rally? No problem. If the market turns down to much lower, it is going to form a head and shoulder pattern with the neckline at the level around 920, meaning that you still get a chance to sell your stocks at the point of right shoulder, which is likely higher than 930.
So here is the trading strategy: waiting for the pull back to around 930. If the March low is indeed the worst, then you just sit long to share the profit of US economic recovery. If the stock market does not turn up at 930, instead, continues to break down below 930, then Richard Russell could be right that this is a bear market rally, and the March low would be retested.
Even then, do not need to be panic. The market would head down , but again with a head and shoulder pattern. Prepare to sell all your stocks at the right shoulder, which is likely to be better than 930.
Is this a bear market rally ? Or, is the March low the bottom? This is the debate of the time. Personally, I believe the March low is the worst.
Having said that, I think all traders should keep an open mind. We do not trade by “forecast”, rather, we trade by the “sign”. If the market starts to move up from the market low as forecasted, then a reversed head and shoulder pattern can be expected. With that in mind, I would make my trades accordingly.
Now the left shoulder and the head have been in place, I am expecting a right shoulder to be formed next. On the other hand, if the market moves down further and even break the March low, then all bets are off .
First attached is the daily chart of S&P 500. The index has moved up from the downward trend. This is a very positive sign.
Also attached is the weekly chart. The weekly chart also shows the breakout from the downward trend. If the index pulled back from here down to 800, that would be the perfect point to get in . A reversal head and shoulder pattern is forming.
I think this is what most money managers are planning. As such, this has been the action of the market.
Some friends of mine are worried about their gold holdings. Understandably, Gold has retreated from the high of nearly $1000 to below $900. There are more bearish comments from the analysts recently. Furthermore, it is very hard to “estimate” the value of gold.
Gold holdings are not like IBM that generate earnings to support the price. Gold is not even like commodity that there is always the fundamental “need” to support the demand.
Gold is simply a yellow metal that is of little practical use.
Attached is the weekly chart of the gold ETF, GLD.
Here is my thoughts to share with those of you who are worried.
At this price, GOLD could go down to as low as $770. However, there is equal probability it could go up to $1000. I think the chance for each case is about even.
What is to be considered, though, is the longer term.
If GOLD should drop to $770, I think the big money would come in and life it up to $880 very quickly.
On the other hand, if GOLD should move up to $1000 and up, chances are that it would never come back to $880 anymore. $1000 gold would be history , just like $35 gold is now a distant history.
I think the Risk/Reward favors holding GOLD at this price.
April 1 (Bloomberg) -- U.S. stocks advanced for a second day as sales of existing homes unexpectedly increased and a manufacturing gauge topped economists’ estimates, bolstering optimism that the worst of the recession is over.
So reflected on the stock market.
However, the pictures that stole the media attention from the G20 meeting are the riots of massive protesters. These people who demonstrated on the streets to protest are citizens of the once wealthiest nation in the world.
The attached picture is a scene in London. I must think again if the worst of this financial crisis is really behind us.
March 18 (Bloomberg) -- The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.
Hmm…and there is the additional $600 billion that the Fed has already committed to buying of mortgage-backed securities and bonds sold by government-sponsored housing agencies. Through emergency loans and liquidity backstops, U.S. central bankers have expanded Fed credit to the economy by an unprecedented $1 trillion over the past year.
Ok…so what is this?
Basically, the US government wants to rescue this economy with a lot of US dollars. However, they can only borrow so much from the private sectors and foreign governments. After all, Chinese Premier Wen Jiabao already voiced concern and said that he is “worried” .
No problem. The Federal Reserve is now out on the front, and they are willing to lend as much money as needed to the US government. After all, the Federal reserve has “UNLIMITED” amount of money. That is the beauty of it! The world’s currency is US dollar, and we own the printing machine.
Of course, the Federal Reserve , basically the central bank of the world, must maintain its position as fair and neutral. So they do not just “give” the trillion dollars to US government, they simply “lend” the money, and they “expect” the money to be returned.
Now, how does US government plan to return that money to the central bank ( of the world )? Obama said that he would tax the wealthy “AFTER” this crisis is over. So, at least, the US government is still maintaining its responsible principle.
In the mean time, though, Wen Jiabao is still worried.
That is the primary trend that is going under this financial turmoil now.
Attached is the weekly chart of Freeport Mcmoran Copper. Copper gets a nickname as “Dr. Copper” because its price action best forecasts the trend of overall economic activity. So, what does Dr.Copper say about the economy? I think it says, the economy fell hard last October, and we are crawling out of it.
Many sectors fell to new lows since last October, but FCX has moved up some impressive 50% since then. This could be an important divergence . The market continues to make new lows, but Dr.Copper is telling something in the opposite direction.
Majority of economists and CEO’s are talking about a recovery in 2010 or later. However, Dr.Copper seems to indicate that the recovery could come sooner.
WASHINGTON, Feb. 23 (Xinhua) -- U.S. President Barack Obama vowed on Monday that he will cut his country's budget deficit by 2013.
"Today, I am pledging to cut the deficit we inherited by half by the end of my first term in office," Obama declared, as he opened a "Fiscal Responsibility Summit" at the White House.
Apparently, Obama administration knows how important it is for US to keep its dollar as the reserve currency of the world and they mean to keep it that way. Indeed, I start to think that, US might just sacrifice its growth to save the status of reserve currency for the dollar. After all, it comes so handy and so secure to own the printing machine of the world’s money.
That news weighed on Gold.
Attached is the weekly chart of GLD.
The strong upward rally of GLD was abruptly checked and reversed. Now GLD is heading down. From the surface, this looks like a regular short term correction with a hard support at the level of $88. However, deep in MJ’s mind, there is this doublet: Is the 10 year old bull market in GOLD finally over?
I think NOT.
Obama’s plan is to cut the deficit by raising tax , not by cutting spending.
In other words, the economy will stay at the expanded stage.
How about the billions of dollars on the “balance” of the federal reserve? Those might stay there forever. In other words, the printed money would move around in the world. Those would never be returned. Why? It is easier that way.
In short, it is much less resistance to inflate out of debt.
My conclusion: The bull market in GOLD is still well and alive.
After walking in the rain for 2 hours, you feel a bit of sore throat. You take a hot bath, drink a lot of fluid, and take double dose of vitamin C. After one good night of sleep, you would likely feel total healthy again.
However, if the sore throat is getting really bad, and you feel body ache all over the place , chances are that, the virus inside you has accumulated to a critical mass that no medicine can ever suppress it from a whole brown bad cold.
The only way for your body to recover is to wait it over. The only advice from the doctor is for you to rest. You must endure more weakness, more pain, some fever, …until finally, the virus attack runs its full complete cycle.
I think that is what we have on this deep recession. It looks more and more likely that the stimulus plan is only to keep the pain more tolerable. We still must let this down turn run its complete cycle.
As for the equity, I am afraid that we have not seen the bottom until the day of capitulation…when all the investors throw in their towels.
Day DeMark: DeMark On Day Trading Options
A great book in trading options. Do not miss this book even though you do not day trade. -MJ
A. J. Frost: Elliott Wave Principle: Key To Market Behavior
A must read in the school of "technical analysis". -MJ
Steve Nison: Japanese Candlestick Charting Techniques, Second Edition
The Japanese wine makers applied their "technical analysis" several hundreds years ago to predict the price of rice. -MJ
Benjamin Graham: The Intelligent Investor Rev Ed. (Collins Business Essentials)
"By far the best book on investing ever written." -Warren Buffett
Jeremy J. Siegel: The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New
A new look at growth stocks... -MJ